Two-pot withdrawals: taxpayers who understate their income face penalties

The South African Revenue Service (SARS) had received more than 1.2 million applications for tax directives for withdrawals from retirement fund members’ savings components by 11 October.

It said a gross amount of R21.4 billion has been paid out in savings benefit withdrawals.

Of the 1 213 646 withdrawal applications, 1 148 729 (or 95%) tax directives were approved for funds to be released. The balance was declined for various reasons, including incorrect identity numbers or tax numbers.

Savings benefit withdrawals are taxed at a member’s marginal tax rate, which can range from 18% to 45% depending on a taxpayer’s income.

SARS Commissioner Edward Kieswetter warned that the revenue collection agency is aware that some taxpayers are deliberately understating their taxable income in an attempt to evade tax on withdrawals.

“SARS is deeply concerned that 213 654 taxpayers have been identified where they have declared incorrect taxable income with the view to have a more favourable tax rate. If a taxpayer understates their income, they are intentionally involved in evading their tax obligation. A penalty will be imposed on taxpayers who have understated income. I wish to caution taxpayers to refrain from this conduct that borders on criminality, as there are real consequences for this behaviour,” Kieswetter said.

Some taxpayers have sought to cancel their withdrawal request once they have found out how much tax will be deducted. But this cannot be done. A tax directive is “final” – once issued, the fund administrator must pay the member’s tax liability in terms of the SARS’s tax directive directly to SARS, failing which it would be liable to pay a penalty to SARS.

SARS will allow the cancellation of tax directive applications only where a bona fide mistake has been made.

Members can find out how tax they are likely to pay by using SARS’s two-pot calculator at https://tools.sars.gov.za/sarsonlinequery/Savings-Pot-Calculator

The calculator is also available on eFiling, the SARS MobiApp, and the SARS WhatsApp channel. Go to https://www.sars.gov.za/two-pot-retirement-system/ for information on how to download and use the calculators.

Digital adoption on the rise

In line with fund administrators’ findings, SARS has also seen a notable rise in the use of digital tools for managing withdrawals.

The WhatsApp calculator has been used 51 547 times since the process began, while the online query system’s calculator has processed 655 801 enquiries. SARS received an additional 53 519 queries through voice channels and 8 655 at its branches.

SARS encourages taxpayers to continue using these digital channels.

“Using these channels means taxpayers do not have to leave their homes or places of employment to stand in undignified queues,” SARS stated.

Tax affairs must be in order

Fund members who want to make a withdrawal from their savings component must submit an application to their retirement fund. The fund’s administrator will verify that the member’s details on the application match those it has on record. If the information does not match, the application will be rejected.

Once the member has been successfully verified, and if he or she has at least R2 000 available in the savings component for withdrawal, the administrator will apply for a tax directive from SARS. The directive indicates how much tax should be withheld on behalf of SARS before the benefit is paid out.

SARS will automatically reject applications for a tax directive if the member is not registered as a taxpayer.

In addition to being registered taxpayers, members’ tax affairs must be in order, which means they must not have any outstanding tax returns, and they must not owe SARS any money.

If a member has a tax debt, SARS will instruct the administrator to deduct the tax debt from the savings component withdrawal and pay it over to SARS to set it off against the tax debt.

However, if a member has entered a payment arrangement with SARS, the withdrawal will not be affected; the debt will still be settled in terms of the arrangement. This is also the case if the member has entered a suspension-of-payment arrangement while negotiating with SARS to defer the payment of a debt.

Different tax rates apply

It is only savings benefit withdrawals that are taxed at a member’s marginal tax rate.

Members of pension or provident funds can make pre-retirement withdrawals from their vested component if they resign from their jobs. These withdrawals are taxed according to the withdrawal benefit table, where only the first R27 500 is tax-free.

Lump sums withdrawn from the savings component at retirement will be taxed using the retirement lump-sum benefits/severance benefits table. In this case, not only are the tax rates lower but up to R550 000 is tax-free.

The R550 000 tax-free benefit is applied to the total of the lump sums taken from the savings component and the vested component. In other words, the R550 000 tax-free benefit does not apply separately to the savings and vested portions components. (At retirement, members are entitled to take up to one-third of the vested component in cash. At least two-thirds must be used to buy an annuity.)

Note that pre-retirement withdrawals from the savings component are not taken into account when calculating the R550 000 tax-free benefit at retirement. This is not the case with the vested component, where any pre-retirement withdrawals erode the tax-free amount.

Members who continue access their savings components before retirement can still enjoy the R550 000 tax-free at retirement. This is provided the pre-retirement withdrawals have not reduced their available funds to below this amount.